Where next for audit?

Audits are crucial to the proper functioning of the capital markets and the
maintenance of confidence in both individual companies and the market as a
whole. There is considerable evidence that auditing supports the integrity of
corporate governance and shareholder stewardship and that in turn reduces the
cost of capital.

However, I believe that the current audit model, and wider corporate
reporting, is capable of being improved to meet the changing needs of market
participants. The fundamental questions revolve around the scope of the audit –
whether this should be extended – and the nature of the audit report itself.

Independent studies support the view that there is generally a high level of
confidence in audited financial statements. But these studies also show that the
market often wants more from the audit. There are three areas in particular I
would like to see debated.

How should auditors communicate what they do?

At present, months of hard work is reduced to a binary opinion expressed in a
short note to the accounts. Much of this is driven by regulatory requirements,
but today’s opinion gives very little insight into the nature and impact of the
audit process. Different forms of communication could play an important part.

Who should auditors communicate with?

The profession could have done more to acknowledge that auditors work for and
on behalf of the investors who own the company. But there are significant
barriers to communication between auditors and shareholders. I would welcome a
wider debate on the type of information investors want, whether this could or
should come from the auditors, and if so what the practical and legal
implications are.

What should auditors communicate?

The financial crisis has led many to ask whether auditors should be given
greater flexibility when expressing opinions. For this to happen, the
environment we operate in also needs to change. Simply asking the audit pro
fession to step outside the box more is not the answer. We need to redefine the
box. This is where the wider reporting model debate is crucial.

The discussion needs to consider widening reporting to include non-financial
information, and given the importance we now attach to this kind of information,
I see value for the market in having assurance over it.

Making this happen will require concerted efforts to overcome a number of
roadblocks. The inherently conservative nature of the profession is one such
obstacle. We need to be prepared to talk more openly about our role, be more
transparent about the difficulties we face and be brave when considering any
necessary changes.

Structural and attitudinal changes are needed to enable auditors to be more
open. To achieve this will require the creation of safe harbours for directors
and auditors. And finally, any strategy, including in the field of regulation,
needs to set out a long-term vision of what it wants to achieve, not just what
it wants to prevent.

The statutory audit model has much to commend it and I believe that building
on it rather than breaking it apart is the right way forward.

Ian Powell is chairman and senior partner at PwC.

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